Economic week

February 9, 2018
by Nick Clark

OCR Unchanged
The Reserve Bank this week kept its official cash rate unchanged on 1.75%.  No surprise there.  Also no surprise that the Reserve Bank continues to say that monetary policy will remain accommodative for a considerable period.  The OCR will likely remain on hold well into 2019.

Despite recent financial volatility the global economy has been improving and global inflation remains subdued.  Monetary policy remains easy in developed economies but stimulus is gradually being un-wound.  Here in New Zealand the economy, after slowing in the second half of 2017, is expected to strengthen in 2018 and the labour market will likely further tighten.  The NZ Dollar has been stronger than expected and partly as a result inflation is lower than expected and will likely take time to push back over 2%.

The next OCR review will be on 22 March, a few days prior to Adrian Orr taking over as Reserve Bank Governor. 

NZ Dollar dampens commodity prices 
The ANZ Commodity Price Index started 2018 with a small increase, but a stronger NZ Dollar more than wiped this out.

The World Price Index was up 0.7% in January 2018 compared to December 2017, the first month-on-month rise since September 2017.  Most commodities increased in price, the exception being milk fat products like butter and cheese and casein.  Whole milk powder (up 5.1%) and skim milk powder (up 3.2%) posted healthy gains, while meat and wool prices were also up (by 0.6%).

The NZ Dollar pushed upwards in January and this resulted in the NZ Dollar Index slipping 2.9% compared to December 2017.

Compared to January 2017 the ANZ World Price Index was up 4.2% and the NZ Dollar Index was up 4.8%.

GDT up again
The Global Dairy Trade auction climbed 5.9% at this week’s event.  All products on offer enjoyed price increases with the two biggest by volume whole milk powder up 7.6% and skim milk powder up 7.2%.  The average selling price was $US3,553 and 22,197 tonnes were sold.  

After slipping throughout the last quarter of 2017 the GDT has increased in each of the three auctions since the start of 2018. This is probably due to expectations of falling New Zealand milk production on the back of recent dry weather.  

Compared to the same time last year the GDT Price Index is up 0.7%.

Employment still strong
The December quarter Labour Market Statistics continue to paint a picture of employment growth and relatively sedate wage inflation. Employment grew 18,000 (or 0.5%) compared to the September quarter and grew 93,000 (or 3.7%) for the year.  Labour force participation rate remained at 71%, near its all-time high, and the unemployment rate edged down again to 4.5%.

In terms of wages, the preferred measure for wage inflation, the Labour Cost Index, increased by 1.8% for the year.  This is slightly higher than the 1.6% increase in inflation as measured by the Consumer Price Index.  Without the September quarter’s care and support worker’s wage settlement, the LCI would have increased by a more modest 1.6%. 

Soil Moisture Data
For the latest NIWA soil moisture data click here

Exchange Rates

Source: Reserve Bank of NZ

Wholesale Interest Rates

Source: Reserve Bank of NZ